Thomas Paine said:
I'm not an apologist for Doug Parker. IMO, he's a lying SOB. But you have to take the tax laws into account when looking at these recent option exercises and stock sales.Thomas Paine said:
Before last week, he owned something like 1.5 million shares of AAL, worth something like $50 million. And he had the old US Airways options that were beginning to expire. He paid $10.7 million to exercise those options and acquire the 505,000 shares. But even a fat-cat like Parker doesn't have nearly $11 million in cash sitting in his checking or savings or money market account. He's well-to-do but I'm certain he didn't have $11 million of extra cash. So where does he get the $10.7 million to exercise those options and buy that stock? He sold some stock, of course, including the stock he bought in 2008 as a show of confidence in US Airways. I remember when he bought half a million dollars worth at about $2.50/sh. Now that those shares were worth about $35/sh as of last week, he has huge capital gains.
http://finance.yahoo.com/news/american-airlines-ceo-nets-13-234306264.html
Why sell the older stock? You know the reason. Capital gains tax rates are only 20% (plus the Obama surcharge of something like 3.8%). Parker is obviously in the top federal tax bracket of about 40% for his ordinary income, so selling the appreciated stock from 2008 means his tax bill will be much smaller. Had he sold stock that he'd acquired less than a year ago, the gain in that stock would be ordinary income, taxed at the much higher ordinary income rate of about 40%. The whole game is to minimize the amount of ordinary income (taxed at 40%) while converting as much of your income to capital gains (taxed at about 24%). That's what rich people do. Warren Buffett gets about $100k in salary (not a whole lot more than Bob Owens used to make) and when Buffett needs more cash, he sells a few shares of stock and pays the lower capital gains rate. Buffett publicly said his tax rate was lower than his secretary's tax rate. Perhaps it's bad public policy, but that's the rules that currently exist.
When all was said and done at the end of last week, he still holds about 1.5 million shares of AAL, worth almost $50 million. His wealth has exploded in the last two years as the value of LCC (now AAL) has risen dramatically. That nearly $50 million in AAL stock is the vast majority of his net worth. I criticize Parker for a lot of things, but he's heavily invested in American Airlines Group. His salary is $700k plus potential bonus plus probably several million worth of stock (options, stock appreciation rights, outright grants of stock, etc). A lot of corporate executives sell some stock four times a year - coinciding with the due dates of federal estimated taxes. Ordinary people have their income tax withheld from their wages. Self-employed and the very high income earners have to send estimated taxes to the IRS four times a year. AA withholds income tax from Parker's paychecks but he's got a lot more tax to pay, like capital gains tax on the sale of stock. Stock he sold to raise money to exercise all those options.
Should capital gains tax rates be much lower than ordinary income tax rates? Depends on your politics. Should corporate executives get millions of dollars worth of stock again and again? Maybe they shouldn't. One day maybe we'll see a revolution and the rich will be toppled. Until that happens, expect more of the same.
